I’m Professor and Chair of the Department of Economics at LIU Post in New York. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.

Should Big Banks Profit From Low-Income Customers?

Let me be clear from the very beginning: Big banks are private enterprises, and as any private enterprise, they do have every right to make a profit. But they can pursue this goal in two ways, the hard way and the easy way.

The hard way is to perform a basic function a true bank performs: Manage risks, amass deposits and provide loans to qualified individuals and institutions. The easy way is to impose fees to their most vulnerable customers, low-income depositors who cannot comply with all sorts of balance requirements for free deposit accounts.

As evidenced by the subprime mess that continues to exert pressure on the US economy to this day, banks failed very badly to perform the basic function of risk management; and some are still in business thanks to generous taxpayer support. As a result, they have been trying to profit by imposing fees on their customers.

Last summer, for instance, Bank of America (NYSE:BAC), Wells Fargo (NYSE: WFC) and J.P. Morgan Chase & Co (NYSE:JPM) announced the imposition of a monthly fee for their debit cardholders. But thanks to an unexpected customer-revolt that spread like a fire, they did reverse course. Now, according to a Wall Street Journal report, the very same banks contemplate of imposing new or additional fees to accounts that don’t create sufficient revenues. Bank of America, for instance, is experimenting with a $6 to $9 monthly fee for customers who do not have a credit card or a mortgage with the bank.

Again, banks are entitled to making profits. But should they profit from every customer, especially those who are less fortunate?

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Banks should have not been allowed to lend to low income/bad credit borrowers for higher interest/higher closing cost, they should have avoided the deal altogether, I think few people would disagree. On the issue of fees, banks cannot be asked to hold accounts to people with low balances that do not compensate for the administrative costs of having an account, so the real questions is wether we a)let those people have accounts for a fee or b)then not let these people have accounts on those banks

A number of years ago, I had a conversation with a fellow who did consulting work in the baking industry. He made a comment that surprised me. He said bankers were among the dumbest people he ever had come across. Well, Bank of America’s decision certainly has proven that point. I guarantee that, after tens of thousands of depositors start closing their accounts and doing the smart thing by moving their money to credit unions and community banks, the “wizards” at BOA will eat crow and reverse this stupid decision. Is it any wonder why this industry was primarily responsible for the near destruction of our economy. Next time they screw up, and there will be a next time, I wouldn’t give them a dime.

While I agree it’s a bad idea for BofA to do this, the answer for low-income consumers is quite simple — join a credit union. That’s exactly what I did when BofA floated the debit card fee idea, and I’m better for it. My local community credit union offers the exact services I need (checking/savings, credit card, auto loan, and mortgage) while offering me better rates than any bank could.

This, hopefully, will make the market more efficient in allocating capital. If you need the services BofA provides, then by all means you should continue banking there and paying a fee. If you don’t use their products/services, it simply makes more sense to move your money to a credit union.

The large banks didn’t want my business, the credit union did. That’s fine, and it’s probably healthier for the market (and my pocketbook) in the long run.

So what’s the premise here, that only small banks should profit from low-income customers?

I personally feel empowered by the fact that banks want to profit from me (a middle-income consumer), it means that the other banks and credit unions down the street are equally as happy to offer me a better deal in hopes of profiting from me, and that competition for the privilege of profiting from me means I have use of banking services.

We should see these fees for what they are – large banks have decided they cannot profitably serve low-income consumers, so they are using these fees to communicate that and get them to leave the roles.

We are all human and make mistakes. Investors made mistakes lowering credit thresholds. Banks got sloppy on underwriting and had out of control comp plans. Borrowers got overzealous ATMing their homes for vacations, improvements, bill consolidation, speculation, etc. Meanwhile everyone points the next entity in the “food chain” as the culprit.

In regards to this loaded article by Mr. M, for a while higher-end clients subsidizes lower-end clients for basic banking needs. This was particularily true with debit interchange. But, poor regulation came in, mainly Durbin, and changed the rules. Banks have to increase capital requirements (which I believe is good) while suffering from punitive regulation outside of the scope of what is good for the system (Durbin), all the while getting blamed for not lending enough because they were too loose with their underwriting 4+ years ago.

So, should Big Banks profit from low-income customers? Why just Big Banks? Why not all banks? Why limit it to banks? As some have said, what about restaurants, grocery stores, movie theaters, online retailers, etc? What about Forbes? Forbes, do you have the right to make money from a low-end subscriber?

I’m not sure whether they should or shouldn’t, but thank you for asking the question. The need to make a profit shouldn’t prevent companies from considering the ethics and broader social impact of the way they do business.

Besides, laying traps for your poorest customers doesn’t sound like the most sustainable business model. In the long run, I would expect companies that focus on delivering value (“the hard way” in this article) to win out over companies that survive by expedient, exploitative shortcuts.

The continuing effort by these banks to make profits by imposing fees begs the question, Why do they need those fees to make profits? If there is an inability to operate the bank profitably, perhaps management needs to shook up and new management not receive any bonuses until the profits are made. Perhaps breaking up would make them more managable. Of course the current management is screaming about all these problems making profits because they just don’t want to play by anybody’s rules but theirs. If there’s a rollback on some of these regulations, everybody in Congress needs to be removed from office. We’ve been screwed again.